Friday, April 10, 2009

Doubt

When in doubt, don't.Benjamin Franklin

Back in the 1990's the comic book industry went through a transformation of sorts. Artists like Jim Lee and Marc Silvestri led a from Marvel with other artists to create their own comic book company called Image. Their initial success led to a massive exodus to the independent comic book industry as tons of established artists and writers decided to throw their hand in the creator own industry.

Then everything imploded. There are a variety of reasons why the comic book industry crashed near the end of the 1990's but it all comes to down to a saturation of product. What fueled the comic book boom were speculators who were jumping in and buying up multiple issues of comics and hoarding them for a later date when they could cash in. In other words they were applying value investing to comic books. The buy and hold strategy works better for investing, not comic books.

One of the factors that makes a comic book valuable is that it is rare. There are none like it or very few in existence. Despite the fact these new comics had marquee names, they were not even worth the paper they were printed on because of the copious amounts of inventory on the market.

And if everyone knows this, there is no incentive to buy or sell because the ROI is just not there. Even worse, those young bucks who decided to go out on their own were now left unemployed by their own hand because their companies had to shut down.

All of this brought about a shower of doubt that comic book fans were unable to shake off for quite awhile

I bring up this obscure fact of comic book collecting because the current economic situation reminds me of that period. I feel what we are experiencing is doubt and even with all the initiatives that are being put to get things rolling, I do not see the real estate market let alone the economy getting back on its feet for quite awhile.

The problem of defective Chinese drywall is no longer confined to coastal Florida.

Drywall produced by Knauf Tianjin Plasterboard Co. Ltd. -- one of the problematic manufacturers identified so far -- made it to the inland town of Sebring, about 90 miles east of Sarasota in Highlands County, the Herald-Tribune has confirmed.

Meanwhile, a national consumer advocacy group is claiming that the scope is much broader. The Washington, D.C.-based America's Watchdog, which is partnering with high-powered attorneys across the country, says that its own investigation has found defective Chinese drywall in Florida, Arizona, Colorado, Georgia, Louisiana, Maryland, Nevada, New Jersey, New Mexico, North and South Carolina, Virginia and Texas.

"We think this could literally turn out to be the worst case of sick houses in U.S. history," said Thomas Martin, the organization's president.

The Herald-Tribune reported on Feb. 1 that shipping records show at least 550 million pounds of Chinese drywall has been offloaded at U.S. ports since 2006 -- enough to build 60,000 average-size homes.

Gases being emitted from the Chinese-made material have been tied to corrosion and blackening of pipes in homes. Some Southwest Florida residents say the gases also have been harmful to their health, a charge the builders and manufacturers dispute. Several lawsuits seeking class-action status have been filed, including one in Sarasota County and another in federal court.

Ryan Willis moved to Sebring with his wife in 2006. They bought their first home -- a custom design that Willis himself helped craft -- built by local builder Meliti Construction. The couple helped paint the walls and lay floor tile.

"It's kind of depressing to think about all the work we put into this place," Willis said. "Now it will all have to go."

In 2007, the Willises' air-conditioner began to fail. It would ultimately do so four times. The couple's silver plates began to blacken, as did metal light fixtures. Three satellite TV receivers, along with their TV, stopped working. Other appliances and fixtures had problems.

"No one could explain what was going on. It was just so strange. I mean here this is a brand new house," Willis said. "It wasn't until a couple weeks ago that we first heard about Chinese drywall."

Willis has pictures taken during the home's construction. When he reviewed them, they showed drywall clearly bearing the name Knauf Tianjin. He immediately called the state health department.

Michael Foreman, head of Sarasota consulting firm Foreman & Associates, recently inspected the Willis home at no charge. Foreman suspects that dozens of homes in the area were built using the material.

During the real estate boom, building materials became very expensive due to the demand from pretty much every where in the world particularly China. In order to keep their operating costs low and to ensure profitability, many developers cut corners where they could. At the detriment of their customers.

Value for a home only occurs if someone to live there and it doesn't look like anyone wants to live in those homes. As for flipping these types of homes, you still have the same problem, if you want to make a profit you have to flip to someone.

With stories of everyone walking from their homes including banks, it would not surprise me that municipalities mandate that all owners of these homes need to clean them up before even thinking of selling them.

That is why a professional flipper would never touch these homes with a ten foot pole, because the homes have basically become brownsfields and it would be a considerable expense to decontaminate them.

It is not just the house that contains this type of drywall that has problems, the neighborhood that has even one of these on their block basically has a functional obsolescence. The gases emitted from these toxic homes is going to spread everywhere and no one knows what type of impact long term will exposure will have on the immediate population.

The only way this situation can be corrected is undertaking a massive cleanup effort which won't happen because of the cost.

This is just drywall we are talking about. There's probably all sorts of other s**t that went during the boom times that we don't want to know about but we are probably going to find out the hard way when we see building collapses occur within new developments sub standard building materials.

That is why I do not see any type of significant recovery in the near future for the real estate market because we are dealing with these types of variables. Not to say there isn't any opportunity out there. However I would strongly advise everyone to exercise adhere to a strict due diligence policy to the point of paranoia. But for people to say that there will be a recovery by the end of this year is crackhead talk.

One of the very large boulders that is acting as a drag on the economy are these toxic assets no one wants. It is gotten to the point that the government is planning on offering more ways for the people to spend money on them.

During World War I, Americans were exhorted to buy Liberty Bonds to help their soldiers on the front.

Now, it seems, they will be asked to come to the aid of their banks — with the added inducement of possibly making some money for themselves.

As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds.

The idea is that these investments, akin to mutual funds that buy stocks and bonds, would give ordinary Americans a chance to profit from the bailouts that are being financed by their tax dollars. But there is another, deeply political motivation as well: to quiet accusations that all of these giant bailouts will benefit only Wall Street plutocrats.

The embrace of smaller investors underscores the concern in Washington and on Wall Street that Americans’ anger could imperil further efforts to stimulate the economy with vast amounts of government spending. Many Americans say they believe the bailout programs — and the potentially rich profits they could yield — will benefit only a golden few, including some of the institutions that helped push the economy to the brink.

“This is an opportunity to forge an alliance between Main Street, Wall Street and K Street,” said Steven A. Baffico, an executive at BlackRock, referring to the Washington address of many lobbying firms. BlackRock, a giant money management firm, is playing a central role in the government’s efforts and is considering creating a bailout fund. “It’s giving the guy on Main Street an equal seat at the table next to the big guys,” he said.

I love how they are trying to spin this as an emotional decision. It has nothing to do with returns but just the fact that the people will be part of a process which is a really bad way to invest. Investing is about profit, it is not about being at the same table as another high roller.

One of the key reasons investors aren’t buying troubled mortgage backed securities (toxic assets) is because there hasn’t been a way to establish prices - there has been little activity. In fact it is a lot like appraising home values today in a market with very limited or no sales activity.

As an appraiser, I was thinking of making an argument to a lender that “because there is no data I’ll appraise the property based on the last time it sold or as of a year ago when there were comps - it’ll be up to me.” Yeah, right.

Last October, just after the credit markets seized, I wrote about the concept of Mark-to-market in my [Mark To Market] To Buy A Fat Pig where I made the case that there may be no value at a certain moment in time. Immediately following 9/11 when there were no sales and some brokers are saying the market fell 25%. How can this be measured if there were no sales?

Nobody knows what these things are worth. And the people who are setting up the prices are the ones who got us in this mess in the first place. Do the words Fox guarding the hen house ring a bell?

If I were a savvy investor, which I am not but I am trying, I would not throw my money into this fund. Not only because I do not know the true value of what I am investing in but also the firms that involved are not doing this out of the goodness of their own heart. They are going to do everything they can to game the system in their favor. However I would not throw the baby out with the bathwater.

If selected — likely to happen by mid-May — money managers like BlackRock could begin a fund within weeks.

As well as BlackRock and Pimco, Legg Mason, another big mutual fund company, and BNY Mellon Asset Management, a big asset manager, have said they are interested in starting retail investment funds to participate in the government’s plan.

For the investment managers, the benefits are potentially large. These big firms can charge healthy fees to investors for taking part. They will also have the marketing prestige of being the firms the government turns to at a time of crisis to help sort out the country’s financial mess.

This is why I would consider investing in the companies themselves who are involved in creating and managing the fund because of this fact. But not the fund itself. Investors are well aware of these factors that is why they have such great doubts and are unwilling to throw their money into the pot for a fund of this nature. Which of course is not going to speed up this recovery anytime soon.

Through the school of hard knocks, the average of American is now far more educated with this financial crisis and the options that are presented just don't seem attractive to even attempt. It is like a game of high stakes poker gone terribly wrong. No one is going to bother to pull themselves up to the table because everyone knows each others hand.

Don't tell me it is going to be alright. It is not. Not for awhile. In the end it will all sort itself out but we are light years away from the end.